What stops banks from lending to energy efficiency projects?

Four years after the US credit market crashed, energy efficiency projects continue to struggle to secure financing.

What’s the problem? A slow economy, of course. But when it comes to energy efficiency – and on-site renewable energy – the problem runs deeper.

It’s not lack of interest in green energy. To the contrary, says Angela Ferrante, director of alternative energy solutions at Energi, a Massachusetts reinsurance company that provides insurance and risk management products for the energy industry.

Banks are interested in lending to green projects, in part because of the number of customers now knocking on their doors seeking financing for energy efficiency and solar installations.

“When they hear it from their clients, it is a lot more compelling than hearing about green so and so in the newspaper,” she said.

In addition, banks see energy efficiency as a new market opportunity. Energy efficiency is experiencing rapid growth and strong government support, especially in the pricey energy markets of California and the Northeast.

“Banks are faced with new regulations and they are trying to see what types of products they can diversify into,” Ferrante said.

But lenders become spooked when they begin to evaluate the risks associated with energy efficiency and on-site solar.

For example, energy efficiency and solar companies often base their sales pitch to the customer on guaranteed energy savings. Many deals are structured so that the customer pays for the energy equipment with money saved on energy bills. What if something goes wrong and the energy savings do not materialize? Will the bank be unable to collect on the loan? And what serves as collateral? If the loan goes into default, does the bank go into the home, office building or factory and rip out the solar panels, lighting, efficient motors, or insulation? Not likely.

Energi is attempting to “de-risk” green energy projects for lenders and energy developers with new insurance and warranty products. One such product, energy savings warranty insurance, backstops the promised energy savings, even for small contractors and energy service companies (ESCOs).

Larger ESCOs have been able to offer such guarantees on their own because of their size and their clientele, which is often the financially stable ‘MUSH’ market – municipal/university/ schools/hospitals. But it has been difficult for smaller companies and contractors, who serve businesses and homes, to do the same.

Thus, such insurance products could be “game changers,” said Kevin Kaminski, Energi senior vice president of alternative energy solutions. Warranty insurance gives smaller energy companies the ability to offer clients the same kind of favorable terms as the larger players – and the smaller companies can literally take the deals to the bank as a low-risk proposition.

As federal funds and incentives become more scarce, the green energy industry is likely to see more and more innovation in financing like the Energi products. Solar gardens are another example of emerging innovation, as well as real estate investment trusts and master limited partnerships (MLPs), a form now allowed for oil and gas investment, but not renewables. For more details on solar gardens and MLPs, see my article “US renewables: New financial models” in the November 2012 issue of Platts Energy Economist. For more on green energy and risk, see Energi’s free guidebook, ‘Risk Mitigation for Reference Guild for New Energy Financing.”

Elisa Wood is a long-time energy writer whose work appears in many of the industry’s top magazines and newsletters. A correspondent for McGraw-Hill/Platts Energy for two decades, Wood writes for Electric Power Daily, the Energy Economist, Electric Utility Week and other Platts publications.

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